The hot topics this winter are income inequality and income mobility. Obama is expected to stress these in his State of the Union address. And this weekend, world financial leaders are meeting in Davos where those subjects are on the table.
Income mobility refers to the ability of people to move out of the income strata that they are born into.
In researching this, the population is divided into fifths: quintiles. Perfect income mobility would mean that no matter which quintile you were born into, you had a 20% chance of ending up in any of the quintiles.
One problem with discussions about this is the lack of an answer of “compared to what?” No one has a theory of why perfect income mobility would be desirable that’s much deeper than … well … that it sounds nice. Anyway, that’s what we have to go on.
Also, to the extent that wealth can earn income, it isn’t clear that we should ever expect perfect income mobility. To the extent that the children of the wealthy can inherit that wealth, and its income earning potential, we shouldn’t see perfect income mobility. (On the other hand, some people see that as a reason for confiscatory estate taxes, even though those tend to be unpopular across the spectrum of wealth: everyone wants to preserve the chance that if they get rich, they can leave the money to their kids).
Anyway, there’s new research out by some huge names in the field. Their most important finding is that the progressive trope that it’s gotten harder for the poor to become rich over the last generation is not true. The authors even admit that they believed this prior to doing the research.
Instead, their results show that while it is harder for the poor to become rich in the U.S. than in many other developed countries, it hasn’t gotten any harder. This article is summarized in both the January 23 issue of The New York Times entitled “Upward Mobility Has Not Declined”, and in The Wall Street Journal’s “New Data Muddle Debate on Economic Mobility".
The results won't fit neatly into either party's political arguments.
"One way to look at this is 'We fought this whole thing to a bloody draw,' " said David Autor, an economics professor at the Massachusetts Institute of Technology who reviewed the study. "Someone else could say, 'Public policy accomplished nothing.' That leaves lots of room for people to think their favorite hypothesis is correct."
Just like poverty measures, we can also talk about relative mobility (can you be rich if your parents aren’t?), or alternatively we can talk about absolute mobility (can you be richer than your parents?).
The chart shown above is about relative mobility: if you’re born poor, you can get rich, but the odds aren’t great … but at least they haven’t gotten worse. Of course, recall the point I made above: it’s not clear how far off of 20% each of these should be.
But, when we look at absolute mobility, the data suggests that the odds are still very good that you’ll be richer than your parents:
Absolute mobility has continued to improve in recent decades because incomes have risen; median family income is about 12 percent higher today than in 1980, adjusted for inflation. As a result, most adults today have more income at their disposal than their parents did at the same age.
Yet the growth rate of absolute mobility has slowed, as economic growth has slowed to a disappointing level over the last 15 years.
FWIW: Earlier research with the same database showed (with awesome interactive graphics) that Salt Lake City (and Utah generally) is one of the best areas of the country for income mobility. The full paper is here. And it’s well-known that Utah has long had one of the most equal distributions of income in the country.
Cross-posted from SUU Macroblog, which is required reading for some of my students.